EUR/USD Weekly Forecast: Stairway to hell, NFP and Fed likely to fuel the current trend

• The US Federal Reserve is set to pull the trigger and raise rates next week.
• Headlines coming from Russia and China are likely to keep investors on their toes.
• EUR/USD is oversold but has room to continue falling to 1.0339.

The EUR/USD pair plummeted to a fresh 5-year low of 1.0470 on Thursday, recovering some ground afterwards but still finishing the week in the red at around 1.0530. There was nothing actually new to send the pair further lower except the same market concerns that are pushing investors into safety, all of them linked to economic growth.

On the war front, the Russian gas supplier Gazprom halted exports to Bulgaria and Poland over failure to pay in rubles. Germany and Greece announced they might send additional gas to both countries, but EU representatives are generally considering the situation as an attempt at blackmail by Moscow which, for sure, will escalate tensions between the two economies. Energy prices continue to rise, fueling already high inflation, and pushing central bankers into more aggressive monetary policies.

Meanwhile, supply-chain issues and bottlenecks, another reason for heating inflation, increased amid the Chinese coronavirus policy of zero tolerance. The country has locked down roughly 26 million people in Shanghai, and over recent days, an outbreak in Beijing exacerbated concerns of further restrictions affecting global economic growth.

Where are the ECB and the Fed heading to?

On central banks, the US Federal Reserve is in a blackout period ahead of the official monetary policy decision to be announced next week. Nevertheless, market players are waiting for at least a 50 bps rate hike, while there are high chances of policymakers unveiling in-deep details on the balance sheet reduction. If that’s the case, it would be the largest hike in over two decades and would be the beginning of a much more aggressive tightening cycle.

It is worth noting that the central bank has largely anticipated such a movement, and most of it is already priced in. The uncertainties and a potential market mover will come from the balance sheet and whether the US central bank is ready to start reducing it and at which pace. Also, and given that the Fed is set to pull the trigger in every meeting, investors will be looking for clues on how large the  June hike will be, as a 75 bps movement has been put on the table.

Across the pond, European Central Bank policymakers have moved to the offensive.  Vice President Luis de Guindos said at the beginning of the week that a rate hike could quickly follow the end of the bond-buying program, meaning a hike in the EU is now expected for July. Governing Council member Pierre Wunsch also hinted at an upcoming rate hike, pointing to lifting rates above zero before the year-end. The interest rate has been below 0% since June 2014.

The US Federal Reserve has already lifted the main benchmark to a 0.25%-0.50% range and would likely take it to around 2.75% by year-end. On the other hand, the ECB is barely planning to lift rates above 0% by that time, with the market anticipating three hikes, at the most, and gradual ones at that. At this point, market players point to 50 bps movements through the year. The clear imbalance between both central banks is fueling the EUR/USD slump and will likely keep it under pressure in the months to come.

Worrisome signs hint at recession

In the last few days, macroeconomic data has triggered some alarms. According to preliminary estimates, US economic growth contracted by 1.4% in the first quarter of the year, while the German Gross Domestic Product in the same period posted a modest 0.2% advance. EU Q1 GDP came in at 0.2%, below the 0.3% expected.

Also, the German Consumer Price Index soared to a four-decade high of 7.4% YoY, while annualized inflation in the Union reached 7.5%, another multi-decade high. In the US, the March Personal Consumption Expenditures Price Index jumped to 6.6% YoY, while the core PCE Price Index was confirmed at 5.2%, below the expected 5.3%. There is growing speculation that inflation may have found a peak, although it is still at multi-year highs and the April down-tick has been modest, to say the least.

The US also published March Durable Goods Orders, which grew a modest 0.8% MoM, below the 1% expected. Fears of an upcoming recession in the US are boosting the dismal market mood and demand for safe-haven government bonds. Treasury yields picked up in the past week, although gains were moderate, with the 10-year note currently yielding 2.84%.

It will not be just the Fed meeting next week. The Bank of England will also announce its monetary policy decision, while the US will publish the Nonfarm Payrolls report on Friday. The country is expected to have added 400K new jobs in April, while the unemployment rate is foreseen steady at 3.6%. Employment is one of the two legs on which the Fed’s decision rests, although it’s not policymakers' main concern now. The job sector has been recovering steadily after the first year of the pandemic and has taken the pressure off the Fed from that perspective. Still, the monthly report could clarify the general picture of US economic progress.

Also, the US will release the April ISM Manufacturing PMI, foreseen improving from 57.1 to 58.0 and the ISM Services PMI, seen at 59.0.

In Europe, the focus will be on German March Retail Sales, seen up by 0.3% MoM, while the EU will also release Retail Sales for the same month, seen up a modest 0.2% MoM.

EUR/USD technical outlook

The EUR/USD pair’s collapse has left the pair oversold on a weekly basis, although an interim bottom has not yet been confirmed. The weekly chart shows that the pair is trading over 600 pips below a firmly bearish 20 SMA, which extends its decline below the longer MAs. Technical indicators maintain their bearish slopes within extreme levels, reflecting sellers’ strength.

The pair is ending Friday with modest gains after falling for six consecutive days. Technical indicators have likewise posted modest bounces but remain within oversold levels. At the same time, the pair is developing far below bearish moving averages, with the shorter one heading south almost vertically some 250 pips above the current level.

The pair has room to extend its slump initially towards 1.0400 on a break below the weekly low at 1.0470, aiming later for 1.0339, the January 2017 monthly low. The former year’s low at 1.0635 is the immediate resistance level, ahead of the 1.0700/20 price zone. A daily close above the latter could lead to a steeper recovery which may end in the 1.0880/1.0920 price zone.

EUR/USD sentiment poll

The FXStreet Forecast Poll suggests that the pair will remain under pressure next week, although consolidating around the 1.0600 level, as bulls, bears and those that see no relevant changes are equally distributed. Bulls are a majority in the monthly and quarterly views, partially because investors are anticipating a bullish correction, but also because the huge slump witnessed these days left some short positions outdated. On average, the pair is seen at 1.0870 and 1.0803 respectively.

According to the Overview chart, the pair still has room for a bearish extension. The three moving averages present bearish slopes, although the downward strength eases as time goes by. The top of the potential range is 1.1200 in all cases, while potential lower lows have increased in the mid-term, with the pair seen approaching 1.0200 in the quarterly perspective.